Lessee Company entered into a lease contract with Lessor Company. Both companies are calendar year companies that prepare annual financial statements. Both use straight-line depreciation with a beginning-of-month convention. Information about the lease contract is as follows: -Inception date: January 1, Year 1 -Commencement date: January 1, Year 1 -Lease term: 5 years -Lessor makes no lease incentive payments -First recurring lease payment of $100,000 occurs on January 1, Year 1 -Lease payments of $100,000 will be made on December 31 of Years 1 through 4 -Lessor expects a residual value of $20,000. This amount is guaranteed by the lessee. -The fair value of the asset is $450,000. -The carrying value of the asset is $425,000. -The lease agreement does not transfer ownership of the equipment and it does not contain a purchase option. -The lessor incurred initial direct costs of $7,000 on January 1, Year 1. -Lessee can compute Lessor's implicit rate. -The leased asset has a 6-year expected life. -Lessee is in excellent financial health. Required: a. Compute the implicit rate. b. Determine the lease classification for both lessee and lessor. c. Prepare the necessary journal entries for the lessee for Year 1.